DRAFT
CONFIDENTIAL
AUDIT COMMITTEE
Minutes of the Meeting of the Audit Committee (the Committee) held at British Waterways’ London
Office, Sheldon Square, Paddington on Wednesday, 12 January 2011 at 10.30 a.m.
PRESENT:
Mr. N. Hugill (Chairman), Mr J. Bridgeman, Mr R. Green, Mr. E. Prescott, Mr.
P. Sarwal
IN ATTENDANCE:
Mr. T. Hales, Mr. R. Evans, Mr. N. Johnson, Mr. P. Ridal, Mr. J. Stirling
(agenda item 11/A06), Mr. K. Labbett, (all from BW), Mr S. Maslin, Mr. T.
Lincoln, Ms. C. Reid (all from Grant Thornton) and Mr. M. Devin (from Prism
Cosec, minutes)
11/A01
MINUTES OF THE PREVIOUS MEETING
The minutes of the meeting of the Committee held on 15 September 2010
were amended and approved.
11/A02
MATTERS ARISING:
Risk Update and Compliance Report (minute 10/A24): With reference to
the Civil Society Project, Mr. Evans stated that benchmarking of terms and
conditions would apply only to directors, it being felt that wider benchmarking
of all employees’ terms and conditions would be best left to NWC. Replying to
a question from Mr. Prescott, Mr Evans confirmed that the benchmarking
criteria for directors were being prepared by the Executive for the
Remuneration Committee.
RE
A review by the Property Director of property investment risk appetite in the
third sector was underway and a report would be prepared for the Audit
Committee.
RE
It was reported that a climate change report was in the process of being
prepared for submission to Defra in April 2011.
RE
11/A03
ACCOUNTING POLICIES AND TAXATION ISSUES (BW/A314)
Mr. Ridal presented his report on accounting policies to be used in the
preparation of the annual report and accounts for the year to 31 March 2011,
together with an update on the current corporation tax strategy previously
presented to the Audit Committee in 2006 and a report on employment tax
compliance. The Committee was invited to (1) endorse the proposed
accounting policies; and (2) note and comment on the content of the report on
corporation tax strategy and endorse the approach being taken.
British Waterways Audit Committee – 12 January 2011
Confidential
Mr. Hugil suggested that the preamble to Mr. Ridal’s report should be
amended to reflect the imminent change of status of BW and amplified to
articulate the purpose of the proposed policies. This was agreed. In this
regard, Mr. Ridal reported that an exercise was underway to recast BW’s prior
year accounts as if BW had been a charity. This was being done preliminary
to the move to the third sector in order that the format of the accounts going
PR
forward and associated issued were fully understood. The Committee
endorsed the proposed accounting policies.
Mr. Ridal emphasised that BW’s strategy on corporation tax was to utilise all
reasonable tax planning mechanisms, to maximise deductions, allowances and
reliefs and the timing of these in relation to BW’s commercial transactions with
the objective of mitigating the tax burden. BW did not engage in tax avoidance
schemes, i.e. tax-driven transactions designed to create tax deductions and
reliefs.
Replying to a question from Mr. Bridgeman, Mr. Ridal explained that there
were numerous tax planning opportunities available to BW but that some of
these were contentious given BW’s public sector status and that Defra
approval of such schemes may be difficult to procure. It was noted that NWC
may wish to adopt a more aggressive tax strategy in due course. In the
meantime, Mr. Bridgeman noted that BW had remitted tax to HMRC which
other organisations might perhaps have shielded. Mr. Evans observed that
this was one of the restrictions by which BW as a public sector body was
currently bound.
Mr. Maslin opined that the key elements of tax strategy preparatory to moving
to the third sector were (1) VAT issues; (2) charitable purposes; and (3)
employment tax issues and suggested that the Committee should be provided
with a list of potential tax planning opportunities and focus on the less
aggressive end of the tax planning spectrum. Mr. Sarwal said that NWC would
need in addition to consider tax losses in the new entity and be sure not to
overlook existing losses in the transition to charitable status. In particular, the
impact of tax on the commercial subsidiary and on its capital requirements
should be assessed. Mr. Ridal assured Mr. Sarwal that this was part of the
ongoing work stream. Mr. Hugill added that the completion and submission of
prior year tax computations should be a priority preparatory to the planned
move to the third sector.
Mr. Hugill concluded the discussion by enquiring how future tax planning
preparatory to moving to the third sector would be implemented. Mr. Ridal
replied that, following publication of the Public Bodies Bill, the tax management
team were now focused on the tax consequences of the NWC’s operational
activities. It had become clear that the tax affairs through transition and the
early years of charitable status would be complex and it was therefore
imperative that nothing be overlooked. Mr. Pullinger, BW’s tax manager, and
his team were working closely with Deloitte to ensure that this was the case.
Replying to a question from Mr. Hugill, Mr. Ridal said that it was too early to
submit firm proposals to the Audit Committee.
11/A04
EXTERNAL AUDIT APPROACH (BW/A315)
Mr. Lincoln presented Grant Thornton’s Audit Approach Memorandum, noting
in his preliminary remarks that, although specific to the year ending 31 March
2011, the report had been written with the proposed move to the third sector in
mind and cognisant of the recent cut in Defra’s grant to BW.
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British Waterways Audit Committee – 12 January 2011
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Mr. Lincoln further noted that, as principal auditors, Grant Thornton were
responsible for the audit opinion given on the consolidated accounts whilst
certain entities in the BW group were audited by other firms.
The report noted that Grant Thornton had provided initial advice to BW on the
potential accounting implications and issues associated with the transfer to
charitable status. Mr. Lincoln commented that, whilst there was likely to be
little impact on the accounts, the Audit Committee may deem it appropriate that
the narrative sections of the annual report should make reference to
transitional issues. Mr. Maslin requested greater clarity on key deliverables
and milestones in the period prior to the switch to charitable status, offering
Grant Thornton’s support across a range of topics including, inter alia, VAT, tax
issues associated with the transfer, pensions, BW Scotland and the transfer of
assets and liabilities from the Environment Agency. Good progress was being
made in understanding the key issues. Notwithstanding this, Mr. Maslin
requested guidance as to how pro-active the Audit Committee wished to be
going forward, for example, working with the executive team to identify
milestones and benchmarking these against other organisations who were
going through a similar process. Mr. Evans, whilst suggesting that this issue
be re-visited later in the meeting during Mr. Stirling’s presentation on Civil
Society projects, noted that this project was ultimately being driven by Defra.
Mr. Green enquired as to what was the convention on management letters
when a business closes part way through a financial year and whether an early
version of the final management letter should be submitted before 31 March
2012. Mr. Maslin replied that the key issue was that there should be a clear
audit trail throughout the financial year. The management letter for the last full
financial year prior to the change to charitable status would in addition need to
address issues relevant to the new entity. Mr. Sarwal added that these would
include the effectiveness of systems and controls. Mr. Lincoln suggested that
Grant Thornton attend the financial health check meetings of BW’s Internal
Audit function, which addresses these issues.
The Committee discussed the issue of the pension deficit. Mr. Sarwal
enquired whether the BW Board would be provided with details as to how the
deficit split between BW’s employees in England and Wales and those
employed by BW Scotland. Mr. Johnson replied that there were no plans at
present to split the deficit; Mr. Ridal endorsed this view, saying that there were
a number of technical challenges in doing so, for example, identifying how
many employees were affected at the vesting date. Nonetheless, Mr. Sarwal
said that at some point this work would need to be done so that the BW Board
would be properly informed in advance of making a decision. Mr. Hales
reminded the Audit Committee that the BW Board was responsible for BW staff
in Scotland as well and England and Wales and that accurate information on
the deficit split was required in order that the Board act fairly as regards both
shareholders. Mr. Hales requested a paper for the working party on the PR/NJ
options available.
Mr. Hales enquired of the auditors whether they should seek an assurance of
the integrity of the business being transferred to the charitable sector, i.e.
whether there was a sufficiency of resource to satisfy the trustees of the new
entity that the business was sustainable. This was especially relevant in the
light of the reduction in BW’s grant from Defra. Mr. Sarwal reminded the
Committee that the auditor’s duty was to opine on BW’s obligations rather than
its aspirations.
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British Waterways Audit Committee – 12 January 2011
Confidential
Mr. Maslin replied that the management letter would address the issue of
viability but that this would not prevent the auditors from signing off the going
concern statement, adding that this should be one of the key milestones
alluded to earlier in the Committee’s discussions.
Mr. Lincoln concluded his presentation by confirming that he did not expect the
audit fee to be materially different to the prior year and assured the Audit
Committee of the continuity of staff during the transitional period. Mr. Lincoln
drew to the attention of the Audit Committee the measures taken to maintain
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the auditors’ independence as set out in Section 4 of his written report. A copy
of the independent assessor’s report on Grant Thornton would be provided to
Mr Labbett.
11/A05
RISK UPDATE AND COMPLIANCE REPORT (BW/A316)
Mr Evans supplemented his written report with specific comments on the main
movements in risks. The reduction in Defra’s grant to BW would inevitably
require a reduction in BW’s cost base, including headcount. Whilst this carried
with it an increase in reputational risk, i.e. on account of possible acts of
omission in relation to planning or environmental issues, Mr. Evans assured
the Committee that the business was moving from a position of strength as
regards risk management.
Commenting on political support for the proposed move to the third sector, Mr.
Evans reported the appointment of John Kittner who had replaced Sarah
Nason, Deputy Director of Defra, and who has been tasked to lead the
Government’s flagship Big Society project to create the NWC.
Replying to a question from Mr. Hales as to whether BW Scotland represented
a risk, Mr. Evans replied that the Scottish minister would have to be a joint
signatory to the order authorising the transfer of BW England and Wales to the
NWC, adding that this would be an issue for NWC to address in due course.
Mr. Evans, replying to a question from Mr. Hales on the transfer of EA
navigations, opined that this issue represented a challenge for Defra, in
particular, identifying the extent of the liability.
It was noted that Mr. Labbett was leading the project to mitigate risk in relation
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to the Olympic project. Responsibilities had been identified although a project
manager had yet to be appointed.
11/A06
CIVIL SOCIETY PROJECT RISKS (BW/A317)
(Mr. Stirling joined the meeting)
By way of an introduction to his written report, Mr. Stirling commented that the
risks associated with the planned move to the third sector were well
understood. Two risks in particular were deemed high. First, the
unsustainability of the business plan following the reduction in Defra’s grant to
BW and, second, the pension deficit, especially with regard to future liabilities.
With regard to viability, Mr. Stirling confirmed that models previously used had
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been deployed and that the underlying financial projections would be verified
to assist the new trustees in their negotiations with Government officials. The
Committee believed there should be an audit of the current quality of the
infrastructure and of the process and assumptions used in the model that
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supports its long term sustainability of the track.
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British Waterways Audit Committee – 12 January 2011
Confidential
The deficit valuation would need to be agreed with the trustees and a pensions
project team would be established to deal with the separation of BW Scotland
and possible transfer of EA staff.
Mr. Evans added that overall the project was tracking to plan but that there
remained a risk that the NWC would not be in place from April 2012 due to
delays in the Public Bodies Bill and State aid clearance. Mr. Hales added that
any anti NWC campaign or other adverse publicity arising from the public
consultation process would pose a further risk. Mr. Evans therefore
recommended that consideration be given to identifying the key questions
likely to be raised during these processes so that appropriate answers could
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be formulated.
Mr. Green raised a number of questions in relation to (1) the reaction of staff to
the CARE pension proposals (currently the subject of extensive staff
consultation); (2) the sustainability of the business plan; (3) EA navigations;
and (4) the position regarding BW Scotland. Mr. Evans replied that a number
of staff were negative about the CARE proposals but he expected the proposal
to be implemented. The sustainable business plan would cover a 5-10 year
timescale and deal with issues including climate change and risk mitigation.
However, the economics of climate change were such that catastrophes on the
scale of the Queensland floods could only be addressed by central
government responding to the needs, and coordinating the responses, of many
NGOs. As noted in minute 10/A05 above, greater clarity was required as to
the extent of the liability associated with the transfer of EA navigations. As
regards BW Scotland, the key task was to ensure alignment of the key
protagonists around a set of shared values.
Mr. Hugill enquired what plans were in place for Defra to deal with the funding
gap. Mr. Evans replied that Defra were unwilling to engage on this issue until
the trustees had been appointed. Mr. Johnson envisaged that the trustees
would be appointed in April 2011 and, following an induction process expected
to take five to six weeks, the trustees would be in a position to engage with
Government about the business plan, probably in September. It was hoped
that the ministerial order would be signed during the autumn/winter of 2011;
negotiations would therefore need to be complete by October at the latest. Mr.
Johnson forewarned the Committee that there was a strong possibility that a
super affirmation process may be required whereby a Select Committee
reports to Parliament.
(Mr. Stirling left the meeting)
11/A07
INTERNAL AUDIT PLAN 2011-12 (BW/A318)
Mr. Labbett’s report was received. Mr. Labbett invited the Audit Committee to
review the internal audit plan and, subject to any amendments, approve the
plan.
The plan was very different to the prior year, the number of projects
undertaken being approximately half the number in 2010/11. About 80% of the
proposed audit plan was concentrated on the continuation of financial health
checks, and on support for key strategic tasks including the transitional
process to third sector status, the transfer of EA navigations, grant reduction
and risk mitigation in connection with the 2010 Olympic Games. The
remaining items related to risk and fraud prevention.
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British Waterways Audit Committee – 12 January 2011
Confidential
Mr. Prescott queried the reduction in the number of secondees in delivering
these projects. Mr. Evans replied that with the focus being primarily on
transitional issues and ensuring the viability of the business plan in the wake of
the reduction in BW’s grant from Defra, even if secondees identified areas
where internal audit resource should be focused, there was insufficient
management resource to address these, at least not until after the move to the
third sector.
The Audit Committee approved the plan.
11/A08
INTERNAL AUDIT PROGRESS REPORT (BW/A319)
Mr. Labbett’s report was noted. It was reported that a list of KPI’s had been
provided to the BW Board in November 2010, that the critical few had been
selected by the Executive and that Mr. Evans had requested that these be
given greater visibility. This was being done via the intranet.
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11/A09
DATE OF NEXT MEETING
Wednesday 8 June 2011 at 10:00am, to be held at British Waterways’ London
office, Sheldon Square, Paddington.
There being no other business the meeting concluded at 1:00pm.
______________________________
Chairman
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